Exit Options

Once your business has been groomed and your strategic business plan is in place, you can consider the options you have for exiting from the business. There are three major exit options available to the owners of private companies:

1) Sell the business to an existing player in your market (be they domestic or overseas) or a complementary business. This option is known as a “Trade Sale”.

2) Float your business on the Stock Exchange.

3) Sell your business to management. This can be either to existing management (a Management-Buy-Out or MBO) or new management (a Management-Buy-In or MBI).


Trade Sale

Selling your business to an existing or complementary business is often considered the best method of maximising your company’s value. Trade buyers are often able to justify a higher price for your business as they are able to factor into their calculation of value, not only the standalone value of your business but also the synergistic benefits that might accrue to them as an owner of your business. Synergistic benefits can include the ability to cut costs from your business and opportunities to increase sales by selling your products in wider markets.

If you are considering a trade sale for your business, there are two main options:
1. A contestable process
2. Exclusive discussions.
A contestable sale process sets out to identify all the potential acquirors of a business, both domestically and internationally. Certain key information on the company is then released to these parties to determine their level of interest in the business. Through the release of further information and a process of asking for indicative bids, the vendor can identify those parties keenest to acquire the business and introduce an element of competitive tension to the sale process. The key features of a contestable sale process are:
  • A wide-ranging search for potential buyers gives the vendor assurance that all potential acquirers have been approached.
  • A competitive auction process empowers the vendor and allows them to set the agenda with respect to price, process and terms.
  • Acquirers can succumb to “deal fever” and pay too much. This has obvious attractions for the vendor.
  • Despite the use of confidentiality agreements, there is a greater risk of information “leaking” to the market, by offering the business for sale to a number of parties. This can be disruptive if the business is ultimately not sold.
Exclusive discussions with a potentially interested trade acquiror is the other variation of a trade sale process. By their very nature these tend to be the result of an opportune approach by another company. Exclusive discussions differ from a contestable sale process insofar as:
  • By only talking to one party, confidentiality issues and the risk of information leaking to the market and employees are reduced.
  • The element of competition is reduced, thus limiting the vendor’s options and potentially reducing the price.
  • The process is less structured.
    Whichever option you choose, be it a contestable sale process or exclusive discussions, they share the following characteristics:
  • For companies whose competitive advantage is highly sensitive to certain confidential information, a trade sale process may represent too great a risk and therefore not be possible.
  • Acquirors will often have very different plans for the business compared to the existing owners. For example, some acquirors will seek to acquire a business merely for its customer base or brand name and will have no need for its management or employees. In these circumstances, owners may be forced to decide between an offer which maximises their value but fundamentally changes the business and one which provides a lower value but protects the interests of their employees.
In conclusion, a trade sale process usually delivers the best price for a business as trade acquirors may be willing to pay for the synergistic benefits of acquiring your business. Within the trade sale process a contestable process will typically maximise the vendor’s control and is therefore likely to extract the best outcome.


Stock Exchange Listing

The Stock Exchange provides a public, liquid market for the buying and selling of shares in companies. As such, floating your business on the Stock Exchange provides a mechanism whereby an owner can ultimately exit their financial and managerial role in the company.

Floating your company on the Stock Exchange is particularly appropriate for companies where:
  • Existing management and owners wish to stay involved in the business.
  • The company is a high growth company and will have a future need for additional capital for expansion and acquisitions.
  • For companies that have a need to motivate and attract management and directors to the company.
  • For companies that wish to raise their public profile.
    The key advantages of floating a company on the Stock Exchange include:
  • Enabling owners of companies in “hot” or fashionable sectors to exploit the high valuations offered by the public markets. The large number of technology and software companies that floated during the boom of the late ‘90s are a good example of this.
  • Enabling companies with a high public profile and strong brand recognition to exploit and build on this. For example, The Warehouse and Michael Hill.
  • Enabling access to the wider capital markets and providing a liquid currency for further fund raisings. This provides a ready source of finance to exploit growth opportunities.
  • Allowing the existing owner and management to retain both a financial and managerial stake in the business while at the same time providing a liquid market for them to reduce their involvement over time.
    The drawbacks of floating your company on the Stock Exchange include:
  • The cost of flotation can be significant and there are the added and ongoing costs associated with being a public company.
  • Floating your business involves a loss of privacy surrounding the company and subjects both yourself and your business to a constant level of scrutiny, both by brokers and the media.
  • The markets exert a constant pressure for short term performance. This together with the uncertainty of being exposed to movements in the markets beyond your control provide added managerial challenges.
  • Potential loss of control of the business.
  • The vendor will be required to maintain a significant holding in the company post flotation and there will typically be restrictions as to when the holding can be sold. Accordingly flotation does not provide a clean exit.
  • Stock Exchange flotations are better suited to larger companies (typically $50m+ market capitalisation).

MBO/MBI Options

Selling your business to an MBO or MBI was traditionally perceived to be the exit option of last resort; only to be chosen when all else had failed. However increasingly MBOs are being seen as effective exit mechanisms in their own right. The key requirements for an MBO or MBI are:
  • A competent management team with a track record of delivering profits and growth.
  • An attractive company (i.e. one that has been groomed) with reasonable growth prospects.
  • An attractive, relatively stable sector.
  • A sound strategy for delivering future growth in the business.
Some important factors to note concerning MBOs are:
  • The management team do not need to be personally wealthy to undertake an MBO. This is because the majority of funding is provided by a combination of bank debt and private equity from a third party investor. As a rule of thumb each management team member will contribute between 1 to 1.5 times their gross annual salary, depending on their personal wealth.
  • MBOs are not only suitable for high technology, high growth companies. Indeed some of the better MBO prospects are relatively stable businesses with consistent, low risk, growth opportunities.

The single biggest misunderstanding in the area of MBOs concerns their funding. The following table sets out how the buy-out of a $10 million company might typically be funded:

  $m
   
Management 0.5
Equity provider 4.5
Bank debt 5.0
   
  10


While management only contribute five percent of the total funding, they will typically receive a much larger share of the company’s equity as an incentive to grow the future value of the business. The equity provider is prepared to “gift” this equity to management on the basis that if management are incentivised to grow the business, they too will benefit from the increased value of their investment.

One of the key attractions of private equity is the flexibility it allows in approaching the sale of your business. For example, significant variations can exist depending on the vendor’s willingness to reinvest in the business and maintain a financial involvement. It follows from the above example that if the vendor was willing to retain an investment in the business then the amount of bank debt and/or third party equity required, would be reduced.

The advantages of using private equity to facilitate an exit from your business include:
  • There are no (or limited) confidentiality concerns as you are not selling your business to a competitor but to the management team and a third party financial institution.
  • MBOs are a seamless process i.e. from the point of view of your employees, customers and suppliers, nothing about the business has changed.
  • MBOs allow the company to retain its identity and independence.
  • MBOs are a way of rewarding your management team (and potentially all of your employees) for their loyalty and efforts over the years.
    That being said, MBOs are not suitable for all companies e.g.
  • Not all companies will be able to attract third party investment as they may lack the necessary growth profile or strength of management.
  • MBOs and MBIs will probably not deliver as high a price as a trade sale process, as there is not the ability to extract synergistic benefits from a MBO. That being said, the price paid by MBOs should be a “fair price”.
  • The third party investors who back MBOs and MBIs will ultimately seek a return on their investment and this is usually achieved by they themselves exiting from the business at some point in the future. This can be either by selling the business, floating the business, or refinancing their investment.


Summary

The exit options your choose will ultimately depend on your individual circumstances and motivations.
The key messages are:
  • Trade Sale - Potentially maximises your value
  • Stock Exchange Flotation - Raises your company’s profile and provides access to further capital
  • Private Equity - Is an extremely flexible solution and enables you to preserve the independence and continuity of your business.